Rothstein Judge Rejects Materials on Victim-Payment Plan

A plan to repay victims of the
$1.2 billion Ponzi scheme run by disbarred Florida attorney
Scott Rothstein is on hold after a judge rejected disclosure
materials explaining the proposal.

U.S. Bankruptcy Judge Raymond B. Ray, who is overseeing the
liquidation of Rothstein’s law firm in Fort Lauderdale, today
ordered a hearing on a motion to end the Chapter 11 case and
appoint a new trustee under Chapter 7.

Several groups of investors oppose the plan by current
trustee Herbert Stettin, which included a settlement with
Toronto-Dominion Bank. (TD) The plan would bar investors from suing
TD Bank and halt pending state-court lawsuits against the bank.

Ray today ordered Stettin to present the so-called bar
order for a separate review. Any amended disclosure statement
can’t say Rothstein’s victims will be paid in full, Ray said.

“This plan is not going forward,” Charles Throckmorton,
an attorney representing Rothstein victims who opposed the plan,
said in an interview. “If they continue to try to get this bar
order that we believe is unlawful and improper, they have to get
that approved or denied on its merits.”

Stettin’s attorney, Paul Singerman, said Ray’s ruling
didn’t mean the bar order was dead. He questioned the victims’
insistence on pushing to convert the case to Chapter 7.

‘Retaliatory’ Litigation

“To the extent that the very same parties who are
expressing a great concern about the expense of litigation want
to spend money to try that issue in the view of the performance
of this trustee, that will be their call,” Singerman said in an
interview. “I believe the trustee litigation is retaliatory and
strategic.”

Stettin’s plan included a provision for TD Bank, Canada’s
second-largest lender, to pay as much as $72 million to remove
the threat of litigation over claims it aided Rothstein’s fraud.
Rothstein is serving 50 years in prison.

TD Bank, based in Toronto, previously reached settlements
requiring it to pay $263.7 million to investors, and lost a
$67 million verdict in the only case to go to trial.

Attorneys for some of the victims said Stettin’s claim to
be able to repay 100 percent of losses was unrealistic.

50 Percent

“They will pay 50 percent of the creditors 100 cents on
the dollar and eliminate everybody else,” Bill Scherer, who
represents 80 investors claiming $228 million in losses, said in
an interview before today’s hearing.

Scherer negotiated the largest settlement with TD Bank,
getting $170 million for a group who claimed losses of
$182 million. The settlement sets aside $50 million for lawyers.

Rothstein’s Ponzi scheme, the largest in Florida history,
was run from his Fort Lauderdale law firm and involved wealthy
investors buying stakes in what he said were payouts in
confidential sexual-harassment and workplace-bias cases.

The cases were fabricated. Rothstein used forged court
documents and phony bank records to sell the scheme to
investors, including hedge funds and South Florida businessmen.
At least 10 people, including Rothstein’s wife, were convicted
of crimes.

TD Bank was sanctioned in August by a federal judge in
Miami who said it “willfully” concealed evidence relevant to
the trial over whether it aided the Ponzi scheme. She ordered a
finding that the bank’s fraud alerts and monitoring systems were
“unreasonable and that TD Bank had actual knowledge of
Rothstein’s fraud.”

Ruling Cited

That ruling has been cited in many objections to Stettin’s
plan by investors who contend they can use it to wrest more
punitive damages out of the bank.

Beyond barring all other claims against the bank, Stettin’s
plan would reduce the amount investors can get by the gross
amount of any settlements they have already received, Scherer
said. He said that would be unfair to his clients.

“We paid the money to bring TD Bank to its knees and now
we’re being punished for it,” he said.

The investors who object to the plan claim to represent
$400 million of $470 million in claims.

Some of Rothstein’s victims support the bankruptcy plan.

“I’ve dealt with Ponzi scheme after Ponzi scheme and this
is the first time I’ve ever seen a Ponzi scheme in which the
victims stand to recover 100 cents on the dollar,” said
attorney Paul J. McMahon, who represents a group of investors,
including an ailing man in his 80s.

Overrule Urged

McMahon urged Ray to overrule the objections, in part so
his elderly client can get his money back as soon as possible.

TD Bank disputes Scherer’s claims that he will be able to
win punitive damages, or any damages at all, in three lawsuits
he filed in state court.

The investors who filed those suits “had no direct contact
whatsoever with TD Bank and never reviewed or relied on any
alleged TD Bank representations in deciding to invest in
Rothstein’s scheme,” the bank claimed in court papers.

Stettin has recovered $83 million and has settlement
agreements for another $40 million, according to court documents
he filed. The U.S. Attorney’s office has recovered at least $40
million in a forfeiture case, Scherer said.

Before the hearing, Singerman said the plan is the most
equitable.

Rothstein’s scheme imploded in the fall of 2009. After
briefly fleeing to Morocco, he returned to South Florida and
surrendered to authorities. He pleaded guilty to five counts of
money laundering, fraud and racketeering in 2010.

His wife, Kimberly Rothstein, is set to be sentenced in
July after pleading guilty in February to conspiring to hide
jewelry, including a 12-carat diamond, that her husband had
given her. After her husband’s plea, she was required to turn
over millions of dollars in valuables to federal authorities.

The bankruptcy case is In re Rothstein Rosenfeldt Adler,
09-bk-34791, U.S. Bankruptcy Court, Southern District of Florida
(Fort Lauderdale). The criminal case is U.S. v. Rothstein, 12-
cr-60204, U.S. District Court, Southern District of Florida
(Fort Lauderdale).